I am Douglas Jester, a senior consultant with 5 Lakes Energy, LLC. 5 Lakes Energy is a Michigan-based consultancy that works principally with manufacturers of renewable energy and energy efficiency products and with technologists developing capabilities for such products. I wish to speak briefly today in support of the renewable energy requirements of PA 295 of 2008.
Without reciting my resume, I would like to note that I spent several years as an executive with profit and loss responsibility for MCI, the large telecommunications carrier that has since been merged into Verizon, in the period soon following deregulation of telecommunications. Part of my graduate training was in economics, and I have a particular interest in the economics of network industries including electric power. I have testified in court and before the Federal Energy Regulatory Commission concerning both economic and environmental analysis of electric power projects.
Markets are a highly useful way to organize activity in a society and I generally favor market-based policies when appropriate conditions are met. There are a number of ways in which the supply of electric power violates the critical assumptions behind our economics theorems that show that markets produce optimal outcomes for individuals and society. I want to highlight four in relationship to my support for PA 295.
First, the distribution of electricity within a given territory is a monopoly, both by law and as a consequence of physics and economics. I defer until another time discussion of the appropriate policy with respect to this monopoly but take it as a given for today. What is often ignored in discussing monopoly electric distribution utilities is that they are also monopsonies, the economist’s word for the circumstance where a potential supplier of goods or services can only sell to a single buyer. Our regulations of electric utilities have historically NOT well addressed the tendency of a monopsony to take control of their supply chains. In fact, our current regulations encourage our monopsonist electric utilities to own their own generation capacity rather than to acquire electricity in a competitive market. PA 295’s requirement that Michigan utilities acquire at least 50% of their renewable energy credits through power purchases is an important and good exception to that problem. The presence of competition as a result of PA 295 has been an important factor in the rapid decline of renewable generation costs that we’ve experienced.
Second, it is characteristic of all organizations that they tend to keep doing what they are good at. New disruptive technologies almost never come out of a company that is strong in a particular market. Instead, new companies develop new technologies and either replace the old companies or force them to change technologies in order to survive. In telecommunications, the current giants such as AT&T and Verizon did not develop the commercial implementations of the Internet nor wireless telephones. They used their considerable financial capabilities to buy the new companies that did commercialize those technologies. The incumbent management and business processes of the traditional companies suppressed internal development of such technologies – a process which I observed first hand and in which I was on the side of the technical revolution. Incumbent electric utilities are good at large-scale central generating plants, especially those that burn fossil fuel. Their internal processes and our regulations are finely tuned to support those traditional technologies. Absent competition for electricity supply to these monopsony utilities, new technologies have difficulty emerging successfully in a biased marketplace. PA 295 has begun the process of breaking through the traditional business model of our incumbent utilities. Businesses that develop renewable energy generation, ,the Public Service Commission staff, and our utilities have all learned a great deal about renewable energy as a result of PA 295
Third, almost all technologies exhibit an experience curve effect in the marketplace. First discovered as an economic phenomenon in the manufacture of aircraft in the 1930s, this idea was brought into general business use by the Boston Consulting Group in the late 1960s. Experience curves show that the cost of producing a good or service declines in a predictable way and rate with cumulative production. You have all likely heard of Moore’s law, which described the doubling of microprocessor power every 18 months to 2 years and is an example of an experience curve for a particular technology. Experience curves are manifest in nearly every technology or product, though the rate of learning varies amongst them. There were strong experience curve effects in coal, gas, and nuclear electric power plants which have now largely been exhausted and show little further progress. Renewable energy technologies are now exhibiting very large experience curve effects, with costs of wind and solar declining by 15 – 20% per year as a result of accumulated experience with these technologies. Research and development can help advance technologies, but there is simply no substitute for actual companies doing and learning from the work of deploying the technology to climb down the experience curve for a new technology. PA 295 has provided the opportunity for learning and experience that would be limited in a monopsony market. I would also like to point out that a portion of the experience curve effect is in the global or national marketplace but some of it is local. That’s why solar panel prices are almost uniform globally but installed solar systems in Germany, California, and New Jersey are only about 60% as costly as they are in Michigan – they’ve gained experience in solar deployment that we have not. On the other hand, thanks to PA 295 we’ve experienced very rapid declines in the cost of wind-powered electricity in Michigan. If, but only if, we continue accumulating experience with renewable energy, it will soon be cheaper than generating electricity from fossil fuels.
Fourth and finally, let me speak to why Michigan policy should favor learning to use renewable generation rather than some other technology as we break up our utility monopsonies. Simply, it is for:
- Distributed generation
- Health and environment
- Economic opportunity
Distributed Generation: Renewable generation technologies are inherently small to medium scale so that they will be spatially distributed and in the long run support a more reliable and resilient power grid, subject to widely distributed ownership that will create a competitive generation market, and deployed more incrementally than traditional generation technologies so that we won’t have to pay for the carrying costs of large amounts of unused generation capacity like we do with large coal or nuclear plants.
Health and Environment: Even setting aside concerns about climate change, the well-demonstrated effects of fossil fuel combustion on human health and ecosystem function are substantial. A recent paper by well-regarded economists in the American Economic Review estimated that these non-climate effects from coal combustion cost us almost twice as much in health care, disease, and early death as we pay for the electricity. Renewable generation technologies impose much less such extra-market costs.
Economic Opportunity: Like it or not, the rest of the world is moving into renewable energy technology quite rapidly. It is the fastest growing manufacturing sector globally and nationally, and we want Michigan to host more than our fair share of this new and rapidly growing industry. Please see the attached fact sheet on this opportunity. The renewable energy requirements of PA 295 have been important both symbolically and economically in starting the development of clean energy manufacturing in Michigan. Deploying renewable energy here is essential to the learning process that will enable us to export and supply a substantial share of what is virtually certain to someday be the biggest manufacturing sector in the world, probably exceeding the automobile industry in global gross sales within a decade.
I encourage you to stay the course with the current renewable energy requirements of PA 295 and to consider increasing those requirements in the period following 2015.